The auto industry is sensitive to the changes in the economy as well as fiscal policy and is accepted as the barometer of economic well-being of a country. The imminent introduction of the goods & services tax (GST) replacing central excise duty, service tax, state value-added tax (VAT) and central sales tax (CST) may change the way business is done today.
The practice in this industry is to sell vehicles to a dealer network that sells as well as services the vehicles. More than 80% of the sales is generally outside the state of manufacture. The distribution of the vehicles may be by way of direct sales to dealers, currently subjected to CST or by stock transfers to depots and stockyards across the country. Both these models entail a tax cost, which gets embedded in the final price to the customers. Though the rate of CST on inter-state sales is a mere 2%, it breaks the credit chain as CST cannot be set off by the dealer against his VAT liability. Similarly, though stock transfers are not eligible to tax, state VAT laws provide for retention or reduction of input tax credits.
The GST regime is expected to overcome this and provide an ninterrupted credit chain. GST, being a consumption tax, is likely to accrue to the state of consumption of goods irrespective of the state of sale. This represents a fundamental shift in the point of taxation from the earlier origin-based taxation system. Though the modalities of collection and transfer to the consumption state are not clear at this stage, it would certainly entail a change in tax costs in the supply chain.
Currently, stock transfers do not attract any tax (other than the loss of input tax credit in the exporting state). It is possible that GST would be applicable on all ?supplies?, including stock transfers. This would have its own challenges. The valuation of such stock transfers have to be tackled as there would be no sale value available to calculate tax. There could be significant cash flow issues as well, if tax is to be paid upfront on all stock transfers. Special transition provisions will be required for the in-movement stock from factory to depot on the date of introduction of GST.
Most of the new investments by auto companies have gone to the states that have offered most competitive tax incentives. Such incentives are largely in the form of subsidies/loan equal to the VAT/CST paid in the state. These arrangements will have to be relooked by the state governments. For instance, under the GST regime, the state of manufacture will not collect any tax (that is, CST) on inter-state supplies. It needs to be seen as to how the existing incentives (in terms of CST exemption/deferral) can continue. Current benefits given under central excise law in states such as Uttarakhand, Himachal Pradesh etc would also need to be relooked at.
One of the reasons for auto component manufacturers to set up units close to OEM plants is to avoid breaking of the VAT credit chain. The removal of CST in the new regime would provide a new opportunity for consolidation of these units into larger units, which would be good for economic efficiency of the sector as a whole.
If the GST rate is fixed anywhere between 16-18%, as being discussed currently, it may be a good news for the industry. The current effective rate works out to be more, particularly for the bigger cars, where the excise duty is higher. That said, GST does offer significant challenges to the industry, as well as opportunities. The industry needs to identify the potential issues and engage into a proactive dialogue with the government to ensure that their concerns are addressed.
The author is a cost accountant & former member of Indian Revenue Service